Protecting Unpaid Wages in Chapter 7 Bankruptcy

When a consumer gets to the point of filing bankruptcy, they often are living paycheck to paycheck. Making car payments, keeping food on the table for the family, and making sure the lights stay on are the important interests that bankruptcy debtors often wrestle with. So, making sure that they can keep their wages protected from the bankruptcy trustee is extremely important.

When a debtor files for Chapter 7 bankruptcy, their property becomes property of the bankruptcy estate. Whether she can keep her wages in Chapter 7 bankruptcy depends on the exemption laws and when the income was earned. In Chapter 7 bankruptcy, the wages the debtor earns after the filing of the case are not considered property of the bankruptcy estate. That means the trustee can’t take those funds to pay off creditors. Therefore, she is entitled to keep all wages earned for work after the filing date. Note that there is a big difference between “earned” wages and “paid” wages. Often times a debtor has some wages that they have earned already but have not yet been paid.

Wages earned prior to filing bankruptcy, even those not received until after the filing date, are property of the bankruptcy estate. Those wages the debtor is waiting to receive for work done prior to filing must be listed as an asset in the bankruptcy schedules. Whether the trustee can take them depends on the bankruptcy exemptions, the amount of income, and whether those funds are needed for reasonably necessary expenses.

In California, there are two sets of exemptions available for use in Chapter 7 bankruptcy. They are called “703 exemptions” or “704 exemptions.” These names are derived from the California code numbers that provide the rules. There are many reasons a debtor would use one set of exemptions or the other. A very common reason to use 704 exemptions is to protect equity in a home. If the debtor has no equity in their home, the 703 exemptions are often the best choice because the debtor can use the “wildcard” exemption, which allows the debtor to protect a certain dollar amount of otherwise non-exempt property.

However, if the debtor has equity in a home they want to keep, they often use the 704 exemptions. This makes it a little more difficult to protect certain assets, like unpaid wages. This can make the timing of filing bankruptcy very important. For example, many people are paid on a monthly basis in Sacramento because there are many state workers. So, if the debtor uses the 704 exemptions to save her home and files her bankruptcy petition on the 28th of the month, those unpaid wages for that month from the 1st to the 28th are not protected under that exemption scheme. Thus, the bankruptcy trustee could require that the debtor turn over those funds to pay back the creditors.

Since many bankruptcy debtors are living paycheck to paycheck, this can be backbreaking. This is yet another reason to seek the counsel of an experienced bankruptcy attorney in your area to make sure that the exemption scheme used is most beneficial to you.